Global Pandemic Response

In a new blog out this morning, Geoffrey Okamoto, First Deputy Managing Director of the IMF, summarizes the financial response by governments since the pandemic began in March 2020. Policymakers’ actions have been unprecedented.

Thus, fiscal support (government expenditure and tax policies) is estimated to have totalled $16 trillion globally. Central banks, through their combined policies of quantitative easing (the buying of government bonds to increase the money supply and lower bond yields) have grown their balance sheets by some $7.5 trillion. Government deficits (measured as a percentage of GDP) are at their highest since the second World War, and central banks’ infusion of liquidity this past year alone exceeds that of the past ten years combined.

The IMF notes that this was “absolutely necessary”. In its absence, the 2020 recession, the worst since the Great Depression of the 1930s, would have been three times worse. As it is, global output has dropped some $22 trillion as a result of Covid-19, relative to what the Fund expected in January 2020.

Looking forward, the IMF notes that policymakers must now transition from saving economies from collapse to strengthening economies with growth-oriented reforms. A “growth-reform tailwind” would contribute to repaying the debts incurred, providing room for critical private investment and reducing the need to raise taxes. For emerging countries, where policy space is depleted, growth-oriented reforms can be sufficiently robust to at least avoid harsh short-term fiscal austerity.

Recovery will take years. But as the urgency to vaccinate diminishes, there is now a perhaps unique opportunity for policymakers to seize the challenge by introducing albeit difficult growth reforms across financial and labor markets.